In the famous words of President Ronald Reagan, “trust but verify” were his words used in creating the INF treaty with the Russians some 25 years ago. It more then ever applies to the same parties today, but also is applicable in most areas of business today. It can be stated in another way, as in having checks and balances in place so there are more than one set of eyes looking at things to catching errors or flag potential problems. It is not uncommon for things to fall between the cracks between the hand-off of various functions, not following through with assignments, catching errors and an oversights, or even scams that are perpetrated. Well run organizations verifies things and has routine checks and balances in place which happen all the time.
I have seen many instances of this happening with clients over the years. Here are 3 examples.
- One client had long tenured employees engage in a scam to bill out bogus employees to clients. The owner of the company was an older man and trusting sole who was not on top of things. This began by creating fake employees by the payroll manager. They then generated checks for them which were sent to a mailbox they set up and cashed money they illicitly received. At the same time the accounts receivable manager never billed out the client and receivables just grew, but were diluted by real payments, so the company’s overall DSO did not grow and attract suspicion for quite a while. These 2 employees instead of cashing in on their ill-gotten gains and stopping, they kept this scan up for a long time and were eventually caught. One served jail time and the other made restitution.
- Another client had dispersed responsibility for billings and collections and the CFO/Controller was not looking at the big picture and understood their role as being in control of all the financial aspects of the company . This included oversight of the entire accounting and financial process, making sure that checks and balances were in place, financial statements and subsidiary records were on time and most importantly correct to inform management on the state of the business from a financial standpoint and identified where things were out of line and corrective action was needed. One of the many problems was the person A who was responsible for billings, provided the information to person B doing invoicing, but person A did not verify that invoices were not actually being sent out. The check and balance needed were not in place and the CFO/Controller did not perform this portion of their job but was mainly concerned that the debits and credits balanced, and the assets equaled the liabilities and equity. As a result of the problem noted above, their DSO rose 3-fold, with a leading to a cash crunch as the company hit their LOC limit, causing major problems and until finally identifying the problem and correcting the root cause.
- A third client built a highly successful company with multiple offices, good profits, and a strong balance sheet. But the owner had become weary of the job and the stress of running the business. So, she decided to become an absentee owner and hired a new president to run the company. He said he had his own CPA to do the books, did not want anyone looking over his shoulder and he had full authority to run the company and she would be free to follow other pursuits. Fast forward three years later and I got a call from her who was in utter distress. The sales and profits of the company disappeared. The president started another company and moved the sales and human capital there with the collusion of his CPA. Millions of dollars disappeared from the balance sheet, and they were left with only debt and no cash. They couldn’t even find a reputable attorney to take on the case and she was left in tears and filed for bankruptcy.
If there were ever cases for trust and verify, the case stories above will attest to that. There are incompetents, crooks, and evil doers out there. Be careful with who you hire and trust but have checks and balances to make sure you are not a victim.